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Economic Theory

Table 5.1 – Determinants of Demand

Factors Results
Consumer The demand for goods depends upon the incomes of the people. The
Incomes greater the income, the greater will be the demand for a good. More
income means greater purchasing power. People can afford to buy
more when their incomes rise. On the other hand, if income falls,
demand for a commodity also decreases.
Number of Ordinarily, when there are more consumers there will be a greater
Consumers demand for goods, everything else being equal (ceteris paribus).
Countries with rapid population growth will demand more food,
assuming that incomes can keep up.
Consumer These are important factors, which affects the demand for a product.
Tastes and If tastes and preferences are favourable, the demand for a good will
Preferences be large. On the other hand, when any good goes out of fashion or
people’s tastes and preferences no longer remain favourable, the
demand decreases.
Prices of Related goods are of two types – substitute and complements.
Related Substitute goods can be interchangeably used. For example, tea and
Goods coffee are substitute goods. If tea is dearer, one can use coffee and
vice versa. Complementary goods are demanded together as bread
and butter or car and petrol.
When price of a substitute for a good falls, the demand for that good
declines and when price of substitute rises, the demand for that good
increases. In case of complementary goods, the change in the price
of any of the two goods also affects the demand of the other. For
instance, if demand for two-wheelers fall, the demand for petrol also
goes down.
Consumer Consumers worry a lot about whether or not current prices are a
Expectations good deal. Is this the lowest price, or will a better price be offered
next week? A computer on sale this week costing $400 might be on
sale next week for $350. Businesses know that consumers fret over
whether now or later is the best time to buy. This has become so
much of an issue that many retailers offer 30‐day low price
guarantees. If the item goes on sale in the same or at a competing

store in the next thirty days, buyers who purchased the item at the
higher price can return and receive the difference. Expectations are
also a concern when prices are increasing.

Demand for a product depends upon a number of factors. The most
important of these are – the price of the product, income of the consumer,

number of consumers, tastes and fashion, the prices of related goods and
consumer expectations. We can put it in the functional form as:

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